India’s Bonds Slump as Subbarao Says Inflation Is Still High

May 30 (Bloomberg) -- Indian bonds fell the most in more
than two months after central bank governor Duvvuri Subbarao
said retail inflation is still high and that the nation’s
balance of payments is under stress.

The yield on the most-frequently traded notes due 2022 rose
to a two-week high as Subbarao said in a speech in the western
city of Ahmedabad that managing the nation’s current-account
deficit is a medium-term challenge. India’s consumer price
inflation has held above 9 percent for 14 months through April.
The rupee fell to a 10-month low today.

“The recent currency depreciation should keep the Reserve
Bank of India alert as it potentially can add to the
inflationary trend, or in the worst case, put a stop to easing
core inflation momentum,” Kotak Mahindra Bank Ltd. economists,
including Indranil Pan, wrote in a research note today. “The
risks to inflation, going forward, continue to be many.”

The yield on the 8.15 percent government notes due June
2022 rose five basis points, or 0.05 percentage point, to 7.44
percent in Mumbai, according to the central bank’s trading
system. That’s the biggest increase since March 12.

The government issued a new 10-year note this month with a
coupon rate of 7.16 percent, which yielded 7.20 percent today.

The shortfall in the current account, the broadest measure
of trade, probably widened to a record of around 5 percent of
gross domestic product, said Subbarao.

The one-year interest-rate swap, a derivative contract used
to guard against fluctuations in funding costs, fell 2 basis
points to 7.13 percent, according to data compiled by Bloomberg.